India Minister Vows System Rejig to Cut Power Prices: Q&A

By Vandana Gombar, BloombergNEF. This article first appeared on the Bloomberg Terminal.

India’s power and renewable energy minister, Raj Kumar Singh, is promising an overhaul of the country’s power system that would lead to cheaper power for commercial and industrial users.

“Viability of the [electricity] system” is the first priority, Singh told BloombergNEF in an interview. Many distribution companies in the country are loss-making. The accumulated amount owed by them to power generators totaled over 870 billion rupees (about $12 billion), as per government estimates.

Metering, billing and collection have become a bigger challenge after some 26 million new households became electricity consumers for the first time. Singh’s answer is to move to smart 100% prepaid meters across the country.

Singh told BNEF that the second prong of his overhaul involves limiting cross-subsidization of residential consumers by industrial and commercial users: “Such cross-subsidy cannot be more than 20%. Most discoms are giving cross-subsidy much beyond 20%. In the New Tariff Policy that we have proposed, we have laid down a trajectory under which it will be brought down to 20% in four years.”

The high cost of power is one of the impediments to local manufacturing, a pet theme of the government under the Make-in-India initiative.

Some investors have been spooked by recent developments in the south Indian state of Andhra Pradesh. The local government there is attempting to reopen long-term power purchase agreements signed with renewable energy developers in what would be a rare case of retroactive tariff cuts in the country. Singh said that the federal government would not allow any retroactive tariff cuts: “It is just not on.”

Singh spoke of India’s track record on climate pledges. “We pledged in Paris that by 2030, 40% of our established electricity capacity will be from non-fossil-fuel based resources. I have already crossed 37%. We will be at 50-55% by 2030.”

“The world is transitioning, and we are transitioning faster than most countries, even though our per-capita emissions are a tenth of that of the U.S.,” he added.

Prime Minister Narendra Modi has committed to 450 gigawatts of renewables by 2030. The near-term target is for 175 gigawatts by 2022, of which 100 gigawatts is solar, and 60 gigawatts is wind. To reach the target, India has invited what he termed “innovative” bids such as one for renewables plus peaking power, and for 24×7 supply with renewables only, to be balanced with hydro, pumped hydro or another battery.

Q: What is the biggest priority for the minister in 2020?

A: I have a few priorities encompassing both power and renewables. One priority is the viability of the system. Some steps need to be taken to strengthen the viability of the system. The second priority is to expedite additions to renewables capacity, to reach or cross the target of 175 gigawatts by 2022. The third priority is that we are changing systems, we are enhancing the role of the market.

Q: What exactly do you mean by the viability of the system?

A: I am talking about the health of distribution companies [discoms]. We have a large number of distribution companies – some private, some under public-private-partnership and some owned by state governments – and many of them are making losses. We want to bring down those losses.

Q: The simplest way of saying it is that the discoms buy power for 3 rupees a unit, and sell it for 2 rupees a unit. It is always a deficit, and surely plugging that is a challenge?

A: No, it is not all that simple. There are two-to-three reasons for the losses. One reason for the loss is that metering, billing and collection is now a challenge. We have a huge consumer base, to which we added 26 million new consumers in the last 17-18 months. We have connected every household. Reading the meter manually every month, printing the bill every month, getting that bill to every household every month has become well-nigh impossible. There are shortfalls in metering, billing and collections. If bills are not paid, sending teams to disconnect is also a challenge, so we have said that we will transition to technology, and go for either smart prepaid or simple prepaid meters. We would prefer smart prepaid, so that we can later transition to time-of-day tariffs. This gives a choice to the consumer; the ability to pay as you can for 50 rupees, or 100 rupees or 1,000 rupees.

We have implemented it in some areas in Delhi. The collection is 500 rupees per meter per month more than it was before. We have implemented it in parts of Uttar Pradesh, which is a challenging state. The extra collection is 200 rupees per meter per month in rural areas, so it more than pays for itself.

Q: India is trying to promote local manufacturing via the Make-in-India initiative. To have an edge in manufacturing, power prices need to be competitive, but commercial and industrial power prices in India are touching double digits because of the discom deficit. It hampers investment in manufacturing. Are high power prices a concern for you?

A: We are cognizant of the problem. The reason for the high tariffs for commercial and industrial users is the cross-subsidy (for residential consumers). The [Electricity] Act and our policy say that such cross-subsidy cannot be more than 20%. Most discoms are giving cross-subsidy much beyond 20%. In the New Tariff Policy that we have proposed, we have laid down a trajectory under which it will be brought down to 20% in four years. If the state government wants to give subsidy to poorer households, they will have to give it from the state budget. If they want to give free electricity, it would need to be paid for from the budget, and it would be the through a direct-benefit-transfer into the account of the consumer.

For the politicians, votes are important, and the cost of power has an impact on the votes. We are not against free electricity. Let it be given, but you can’t get free electricity at the cost of some other consumer. The tariff policy is awaiting government approval. A group of ministers is going into it.

Q: Will these policy changes for tariffs be finalized and implemented in 2020?

A: Once the tariff policy is out, it becomes a legal obligation, to be followed by all discoms and regulators. This should be in place in the next two-to-three months.

Q: And the result would be cheaper power?

A: What we are saying is that you cannot pass the burden of inefficiencies on to the consumer. You cannot pass it on in tariff except up to a limit, and 15% is the limit. The cost of power for industry has to come down.

Q: By what percentage can power tariffs come down?

A: Power tariffs have already started coming down. The rate at which we sell electricity has already started coming down, as we have changed some rules to bring about significant savings in the cost of power [charged] by NTPC Ltd.

Q: You agree that green energy is much cheaper, but why is India still building new coal plants, when the power cost is higher, and there is pollution?

A: We are very clear in our mind. For us, the environment is most important. We are adding renewables faster than any other country, except China, because we are very serious towards the environment. From 2017-18 onwards, every year we are adding more renewable energy than conventional energy, but you must understand that renewable energy is intermittent. India’s peak demand is 183 gigawatts, and unless and until you have a base which is stable, you can’t meet this requirement. You need a steady balancing load that can only come from maybe conventional, nuclear or hydro. We are emphasizing hydro – we have 45,900 megawatts and another 13,000 megawatts under construction.

On costs, you must realize one thing. We have discoms who have signed PPAs for their entire requirements involving a fixed cost and a variable cost. When a discom buys renewables, it still has to bear the fixed cost of 1.25 to 1.75 rupees per unit. There is a thermal plant that is idle, and there is a cost of balancing, because renewables are not 24X7, so I have to either have a battery, or hydro on standby. So to you it looks like 2.50 rupees per unit, but for me, the cost is actually 5-5.50 rupees a unit, but as a country, our government decided that we will do this.

India’s annual PV capacity addition and forecast 

Q: You just mentioned a tender for 24×7 renewables, so there are technological solutions to intermittency, though they may not be very cost-competitive?

A: It is important for us to pioneer this, and that is why we were one of the first countries to add storage and come out with a bid. We have come out with a policy to encourage battery storage and battery manufacturing here. One or two Indian companies have told me they will start battery manufacturing.

Q: Foreign investors have favored renewables rather than the conventional power sector in India. The renewables ministry has set up a facilitation center. What was the trigger for that?

A: We wanted to be proactive. We felt that if we want lower prices [of power], then we need to help the investor, so we said, once you win a bid, you will find us with you for everything: for getting the land, for getting the connectivity and even for getting the loan from a bank.

Q: Investors seem to be spooked by what they are seeing in the state of Andhra Pradesh: retroactive tariff cuts. What would you say about that?

A: It is just not on. That is what I told the chief minister, as soon as he announced this. I told him you cannot reopen contracts. We are very clear in our mind that a contract is sacrosanct. Any party that violates a contract will find that there are sanctions. We have already decided that we will petition the Supreme Court. Apart from that, we decided in a meeting a few days back that unless Andhra Pradesh starts honoring the contracts, our financial institutions will not be providing any funding to the state at all. Institutions under the Ministry of Power will shut the tap. Investors have got the message that the government of India is standing by them, and it means business. That is why I am still getting investment, and my bids are so low. Of the recently concluded 1200 megawatts bid, 900 megawatts were subscribed by foreign investors at a competitive rate.

Q: Rooftop solar is quite a distance away from the 40-gigawatts target. Given the amount of sunlight we have, shouldn’t we be having far more rooftop solar?

A: We are resolving issues. Discoms feel they will be losing business, so they delay giving net metering. Now we have changed some things. The agency responsible for implementing rooftop solar will be the discom. Secondly, net metering regulations were highly unfavorable to discoms. We have made that more even. We are incentivizing discoms to add rooftop capacity. I am coming out with something on “rights of prosumers” soon. We are going to mandate that every ministry of the government will solarize its rooftop, as well as that of attached organizations. We will be asking state government to do the same.

Q: By when would consumers get the choice of using 100% renewable electricity?

A: Companies can get green power through open access. We have also written to many big companies, asking them about their preferences on green energy. We have already got 2,500 megawatts of demand. The next step is to bid it out, which will be done through SECI [Solar Energy Corp. of India].

Q: The International Solar Alliance is an interesting initiative. What did we hopeto achieve under it, and how far have we come? Are you satisfied with the progress?

A: Membership has grown to 86 countries. A couple of projects have already taken off, such as the solar pumps tender. They have been able to mobilize more funds. I see this as enabling us to do in Africa and in other regions what we did in India when we extended electricity to every house and added 26 million new consumers. We are also looking at some sort of east-west grid that will make solar energy available for a longer period of time. So if you connect the east, maybe Vietnam, through Myanmar, India, and go west to Oman and further, it is almost like the sun never sets. We can export solar energy. That is our prime minister’s vision of “one world, one sun, one grid.” We have asked the World Bank to carry out a feasibility study on the transmission links.

Q: Your thoughts on electric vehicles?

A: I think India wants it. We want to go electric, and the reason for that is the environment. Imagine if Delhi had all electric vehicles. Second, we want to reduce our dependence on fossil fuels. Again, that involves a cost because we have a very vibrant motor vehicle industry, which employs a large number of people. So it cannot be something which can be rolled out in one year or two years. It is something which we have in our mind, and we are propagating it. By 2030, you will see a large number of electric vehicles.

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